The Unique Quandaries Faced in Recovering International Cryptocurrency Frauds

Cryptocurrency itself is a string of computer-generated code.  This line of code is accessed by an owner’s unique passcode secret private key.  Each owner’s cryptocurrency is kept in their “Virtual Wallet”. Virtual wallets are similarly anonymous as are the virtual currency balances. The transfer of cryptocurrency is based upon the block chain protocol, a public decentralized ledger that identifies transactions by a digital code with no link to a person or place.

Practically, there is no public record of virtual currency transfers.  Other than the debtor’s own testimony, a creditor would not know where to begin searching for evidence of virtual currency purchases or transactions. There is no way for a creditor to identify either the owner or location of a transferee’s cryptocurrency address. In some cases, the debtor could honestly state that he does not know the identity of the individual who received his cryptocurrency transfers.

For asset protection purposes, a cryptocurrency account currently functions similarly to offshore banking prior to the IRS’s crackdown of anonymous personal foreign accounts.  Today, it is almost impossible for U.S. citizens to establish an anonymous bank account, or any type of bank account, outside of the U.S. With the advent of Bitcoin, a U.S. citizen can open and maintain a financial account that has creditor protection features similar to an offshore bank account in that the Bitcoin account is anonymous and can be maintained outside the geographical jurisdiction of domestic courts. Since block chains are decentralized, they are not subject to any central authority (such as a bank or other financial institution) that might be legally compelled to provide a court with access or control over assets in its possession. Without the complete private key, no court or legal authority can manipulate ownership of a block chain asset.

At the moment, creditors face obstacles of identifying potential defendants and the international nature of the transaction.  Properly selected offshore fiduciaries holding accounts are unlikely to become subject to the jurisdiction of a court where a defendant may be sued.  Absent jurisdictional authority, a court is powerless to compel the fiduciary to turn over assets. Similarly, a US court could try to compel the party to turn over the account or information about the transaction. The court’s contempt powers could be used to coerce compliance. Arrest and incarceration can be utilized. See In Re Lawrence, 279 F.3d 1294,1300 (11th Cir. 2002); FTC v. Affordable Media Inc., 129 F.3d 1228, 1229 (9thCir. 1999). But, on cruel and unusual punishment grounds, incarceration cannot be imposed forever. If the asset is more important than personal freedom, a court’s power of compliance is limited.

There are two equitable remedies that exist under English common law which could be flexibly applied to these evolving transactions. One existing remedy is the equitable pre-trial discovery device known as a Norwich Pharmacal order requiring third parties to disclose information to potentially identify the wrongdoer, to trace funds and to assist prospective plaintiffs in determining whether a cause of action exists.  (There are five states in the U.S. that also allow for pretrial discovery to identify the wrongdoing.)  Norwich orders, being a flexible tool of equity, could assist in claims involving cryptocurrency transactions.  It may be possible that identification information might come from “know your customer” information given a bitcoin exchange.  Proceedings could be constituted as “the bitcoin holder with the public key number…”  However, the hurdle still exists to identify the wrongdoer.

The second equitable remedy is injunctive relief.  Courts have granted world-wide injunctions, particularly when the impugned conduct is occurring online and globally, such as the internet.  InGoogle Inc. v. Equustete, 2017 SC 34, the Supreme Court of Canada recently held that injunctive relief can be ordered against somebody who is not a party to the underling lawsuit, even if that third party is not guilty of wrongdoing.  Google was ordered to stop displaying search results globally for any Data Link websites.  “The problem in this case, is occurring online and globally.  The internet has no borders; its natural habitat is global.  The only way to ensure interlocutory injunction (order) attain its objection was to have it apply where Google operates – globally.”  Thus, if the third party to the block chain transaction can be identified, there may be a remedy to discover information and wrongdoing.

Therefore, courts will need to apply not only new remedies, but expand existing ones.  While the identities of the buyer and seller are encrypted, a transaction record is maintained on the public ledger. In the future, anti-money laundering laws and cryptocurrency exchanges may require the collection of personal data of customers. Until then, the challenge of recovery will require creativity and experience.


© Horwood Marcus & Berk Chartered 2018.
This post was written by Eric (Rick) S. Rein from Horwood Marcus & Berk Chartered.

Climate Change and Trends in Global Finance

On December 12, French President Emmanuel Macron, joined by President of the World Bank Group, Jim Yong Kim and the Secretary-General of the United Nations, António Guterres, hosted the One Planet Summit highlighting public and private finance in support of climate action. The summit’s focus centered on addressing the fight against climate change and ensuring that climate issues are central to the finance sector.

The summit’s most notable event was perhaps the announcement that insurance giant Axa would be dumping investments in and ending insurance for controversial U.S. oil pipelines, quadrupling its divestment from coal businesses, and increasing its green investments fivefold by 2020. Axa’s plans echo those of BNP Paribas, who, in mid-October, announced that it would terminate business with companies whose principal activities involve exploration, distribution, marketing, or trading of oil and gas from shale or oil sands. The bank also ceased financing projects that are primarily involved in the transportation or export of oil and gas. These moves themselves follow controversy over the Dakota Access pipeline in the U.S. from mid-March that resulted in ING’s $2.5 billion divestment in the loan that financed the pipeline.

These measures prefigure what might be a more conspicuous trend of large institutional investors moving more rapidly away from fossil fuel investments and into green investments. In mid-December, the World Bank said it would end all financial support for oil and gas exploration by 2019. Around the same time, New York Governor Andrew Cuomo revealed a plan for the state’s common retirement fund, with over $200 billion in assets, to cease all new investments in entities with significant fossil-fuel related activities and to completely decarbonize its portfolio. Recently, HSBC pledged $100 billion to be spent on sustainable finance and investment over the next eight years in an effort to address climate change. Additionally, JP Morgan Chase committed $200 billion to similar clean-minded investments, Macquarie acquired the UK’s Green Investment Bank, and Deutsche Bank and Credit Agricole both made exits from coal lending. As the landscape of global finance shifts, it will be important to monitor how funds, banks, and insurers address the issues related to climate change.


©1994-2017 Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C. All Rights Reserved.

SEC Approves NYSE Proposed Rule Change Requiring a Delay in Release of End-Of-Day Material News

On December 4, 2017, the U.S. Securities and Exchange Commission (“SEC”) approved the New York Stock Exchange’s (the “NYSE”) proposed rule change to amend Section 202.06 of the NYSE Listed Company Manual to prohibit listed companies from releasing material news after the NYSE’s official closing time until the earlier of the publication of such company’s official closing price on the NYSE or five minutes after the official closing time. The new rule means that NYSE listed companies may not release end-of-day material news until 4:05 P.M. EST on most trading days or until the publication of such company’s official closing price, whichever comes first. The one exception to the new rule is that the delay does not apply when a company is publicly disclosing material information following a non-intentional disclosure in order to comply with Regulation FD. Regulation FD mandates that publicly traded companies disclose material nonpublic information to all investors at the same time.

© 2017 Jones Walker LLP
This post was written by Alexandra Clark Layfield of Jones Walker LLP.
Learn more at the National Law Review‘s Finance Page.

MAS Releases “A Guide to Digital Token Offerings”

On 14 November 2017, the Monetary Authority of Singapore (the “MAS”) released  “A Guide to Digital Token Offerings” providing general guidance on the application of the securities laws administered by the MAS in relation to offers or issues of digital tokens in Singapore.

The main consideration is whether the digital token is designed in a way that would make it a product regulated under Singapore’s securities laws i.e. if it behaves like a share, debenture or some other form of security. If a token does not function like a security, then technically, neither will the security laws apply.

In the first case study in the guide, Company A plans to set up a platform to enable sharing and rental of computing power amongst the users of the platform. In order to raise funds to develop this platform, Company A intends to offer and sell digital tokens wherein the token will have utility upon completion. The MAS states that the digital token in this case study would not constitute a security under the Securities and Futures Act (Cap. 289). It appears that this is because other than the right to access the issuer’s platform to rent computing power, the digital token in question did not appear to have any other “rights” or “features” that made it look like a security.

Therefore, if a digital token is structured in a similar way as set out in this case study, then it would presumably not trigger the relevant Singapore securities laws, notwithstanding the fact that the sale of the token may have been used to fund the building of the platform.

The practical issue to consider then is this:- How will a company convince its investors to purchase such digital tokens in the first place, given that they do not appear to offer any type of rights or features that would give potential purchasers of those digital tokens a return on their investment?

Singapore is devoting huge resources to building the FinTech industry and offering many incentives to new entrants in the jurisdiction. Initial Coin Offerings (“ICOs”) structured like the example herein would seem to be acceptable.

This post was written by Nicholas M. Hanna & Samantha See of  K& L Gates., Copyright 2017

Equity Plan Share Reserves: How to Increase Its Life Expectancy: Executive Compensation Practical Pointers

Efforts to conserve an equity plan’s share reserve should begin the day the issuer’s stockholders approve the plan (or share increase), and should continue going forward. Issuers that do not make such efforts tend to face problems relating to dwindling share reserves, including moving to cash-based programs, hiring proxy solicitation firms to garner stockholder support for share increases, and overcoming possible negative reactions from ISS.

The following are some ideas an issuer could use to extend the life of its plan share reserve:1

  • Grant awards that are settled in cash – Depending on the terms of the plan, a cash-settled award may not draw from the share reserve.2 An alternative would be settling a portion of the award in shares (e.g., up to target), with any achievement above that settled in cash.
  • Grant full value awards like restricted stock or RSUs – Such grants provide greater value to the holder than options or SARs, the latter providing incentive only to the extent the share price exceeds the exercise/strike price, but draw from the share reserve the same as full value awards.3
  • Permit net-exercise of stock options – Depending on the terms of the plan, the shares subject to the option that are netted in a net-exercise may not draw from the share reserve. Also, a net-exercise could be helpful to a Section 16 insider to avoid a blackout (i.e., no open market transaction occurs with a net-exercise).4
  • Amend the plan to permit maximum withholding – A recent change in accounting rules provides that maximum withholding will not result in liability accounting treatment. Depending on the terms of the plan, withholding of shares to cover taxes may not draw from the share reserve.
  • Grant stock-settled SARs rather than options – A stock-settled SAR will provide the same economic result as a net-exercised option, but since a SAR is settled in shares with respect to only the excess over the strike price, fewer shares are burned than with a net-exercised option.
  • Use inducement awards for new executive-level hires and certain M&A events – The award must be a material inducement to getting the executive/employee to accept the position. If properly structured, these awards can be made outside of the plan and do not require stockholder approval under NYSE or NASDAQ rules.5
  • Implement an ESOP or ESPP – ESOPs, which are subject to ERISA, do not require stockholder approval under NYSE or NASDAQ rules. Depending upon the structure of an ESPP, stockholder approval may be required.6

1. Some of these methods involve liberal share counting, which is disfavored by ISS.

2. Liability classification would apply for accounting purposes and settlement in cash will not count towards satisfying any share ownership requirements.

3. This method will not work if the plan contains fungible share counting provisions.

4. However, a net-exercise of an incentive stock option could jeopardize the ISO’s favorable tax treatment.

5. Without stockholder approval, such awards could not qualify for deduction under Section 162(m), if applicable.

6. Broad participation requirements may apply.

This post was written by Matthew B. Grunert  & Carolyn A. Exnicios of Andrews Kurth Kenyon LLP.,© 2017
For more legal analysis go to The National Law Forum 

Six Reasons Why Wholesale Repeal of Dodd-Frank is Unlikely

Donald Trump Dodd Frank repealIn the days following the November elections, U.S. President-elect Donald J. Trump promised that his Financial Services Policy Implementation team would be working to “dismantle” the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”). However, a more recent account in the Wall Street Journal reported Mr. Trump’s transition team as tempering his promise in favor of rescinding or scaling back the individual provisions Republicans find most objectionable.

In light of the current political and macro-economic environment, here are six reasons why a wholesale repeal of Dodd-Frank is unlikely to occur:

  • Congressional Resistance – A wholesale repeal of Dodd-Frank would have to be effectuated through congressional action and would likely face a democratic filibuster. This would require opponents of Dodd-Frank to muster a 60-vote block in the Senate in order to advance the proposal. Legislative horse-trading to achieve specific objectives that are key to the Republican majority may ultimately prove to be more strategically advantageous.

  • Public Perception – Actions of the new administration which could be perceived as advocating for easing the burden on the financial services industry may alienate the middle-class constituency who were significantly impacted by the great recession and who ultimately propelled Mr. Trump to the Presidency.

  • Balance of Cost – Following massive investments in infrastructure and processes, the industry may perceive the costs of undoing the compliance programs put in place subsequent to Dodd-Frank as outweighing the benefits to be derived from decreased regulation.

  • Accepted Expectations – Counterparties have come to accept the safeguards and reporting requirements put in place by Dodd-Frank as constituting baseline expectations in business transactions. A repeal of Dodd-Frank would leave industry participants to reconstruct by contract what may have been previously mandated under law.

  • International Developments – In the wake of the Brexit vote, international financial organizations may be evaluating the relocation of their operational centers to locations in the U.S. The possibility of significant financial regulatory overhauls and the accompanying specter of an unknown business environment may dissuade consideration of the U.S. by such organizations.

  • Absence of a Perceptible Problem – Dodd-Frank was passed on July 21, 2010 with the wake of the great recession providing momentum and popular support for its enactment. Conversely, there is no corresponding economic situation presently existing that critics can point to for its repeal. The DJIA is up approximately 90% since July 2010. The real estate market has remained strong and, even with the recent increase by the Fed, interest rates remain low, allowing consumers access to both homeownership and financing on attractive terms.

In addition to the issues identified above, the incoming Presidential administration and congressional delegation may face additional hurdles in advancing comprehensive legislative initiatives to pare back Dodd-Frank. As the post-election environment cools and the country marches towards inauguration day, the financial services industry can only hope that clarity on the direction of the U.S. regulatory environment begins to emerge.

The Post-Election FinTech World: Are Happy Days (for Bankers) Here Again?

Fintech financial technologyIn the days following the U.S. federal elections that resulted in the election of Donald Trump as President and Republican control of the 115th Congress, FinTech companies, banks, and other financial institutions are increasingly asking whether they still need to worry about compliance with the landmark Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”), Consumer Financial Protection Bureau (“CFPB”) regulatory actions, and other financial services regulations.

It is true that there will likely be some significant regulatory changes, but it is a little too early for industry participants to pop the champagne corks.  Here are our thoughts about some of the top issues impacting FinTech companies, banks, and other financial institutions:

Dodd-Frank and the CFPB

Created under Dodd-Frank in response to the financial crisis of 2007–2008, the CFPB’s stated aim is “to make consumer financial markets work for consumers, responsible providers, and the economy as a whole.”  Since its inception, the CFPB has regulated the consumer financial services marketplace through sweeping rulemakings, including the recent issuance of a long-awaited final rule for prepaid accounts.[1]  Precedent-setting enforcement actions also have been increasingly utilized by the CFPB in lieu of, or as a precursor to, rulemakings promulgated in accordance with the Administrative Procedure Act.  Policymakers, banks, and others within the broader financial services industry have criticized the CFPB for regulatory overreach and for imposing burdensome, duplicative regulations on market participants that ultimately impact on consumer choice.[2]

It is no surprise, therefore, that revising the CFPB’s structure and operations to try to make the agency more transparent and accountable is among the top priorities of both the incoming Administration and Congress as part of reform of Dodd-Frank.  Some version of House Financial Services Committee Chairman Jeb Hensarling’s (R-TX) financial reform legislation (H.R. 5983, the “Financial CHOICE Act” or “FCA”), will undoubtedly serve as a basis for any reform efforts undertaken in the early days of the Trump Administration and the new Congress.  Although the CFPB will likely survive in the new Administration and Republican-led House and Senate, the FCA furnishes a blueprint for the kinds of reforms that likely will be made.

The FCA contains provisions that would make significant modifications to the structure of the CFPB by making it an independent agency outside of the Federal Reserve to be headed by a five-member commission, instead of a single director.  The FCA would rename the CFPB the “Consumer Financial Opportunity Commission” and would give the agency the mission of consumer protection and competitive markets.  The FCA would also subject the CFPB’s funding to the Congressional appropriations process.  The FCA also includes provisions designed to address the CFPB’s use of enforcement actions by repealing the agency’s authority over “abusive practices” in the consumer financial services industry.  In addition, the FCA also contains H.R. 5413, the “CFPB Data Accountability Act,” which would require the CFPB to verify a consumer complaint prior to posting it on the CFPB’s website.

Durbin Amendment

The FCA also contains a provision that would repeal the “Durbin Amendment,” which limited the interchange fees that banks charge merchants to process electronic debit transactions.  Following enactment of Dodd-Frank, many payments industry participants raised concerns that small banks and low-and moderate-income consumers have been adversely impacted by the Durbin Amendment, while retailers have disproportionately benefited.  Given the anticipated focus of the Trump Administration and new Congress on the promotion of financial market innovation and competitiveness, it is increasingly likely that changes to this provision could be considered as part of broader financial regulatory reform efforts.  Whether it will be entirely repealed is another question.  Merchants, who fought hard for the Durbin Amendment by arguing that the high fees imposed by major banks and the payment networks were unfair, can be expected to vigorously oppose such an effort.

Regulatory Outlook

The regulatory outlook for the CFPB for the near future will likely be impacted by a number of important factors, including the outcome of the CFPB’s recent petition to the U.S. Court of Appeals for the District of Columbia Circuit (“D.C. Circuit”), which requested the full D.C. Circuit to rehear PHH Corp. v. CFPB.[3]  The petition follows the recent holding in PHH by a three-judge panel of the D.C. Circuit that the CFPB’s existing structure is unconstitutional and that the director of the CFPB serves at the pleasure of the President.[4]  President-elect Trump currently has the ability to remove current CFPB Director Richard Cordray “for cause” and to nominate a replacement to be confirmed by the Senate.  Such a change in the director of the CFPB before the D.C. Circuit makes a decision on whether to rehear PHH could have significant implications for the CFPB’s regulatory activities.  Republicans in the 115th Congress also are expected to use the Congressional Review Act (“CRA”) to repeal certain regulations recently issued during the Obama Administration.  However, many of the CFPB’s rules are expected to remain in place but be subject to additional Congressional scrutiny.  Notably, some Congressional Republicans have previously expressed concerns about the broad scope of the CFPB’s rule on prepaid accounts, although it is not yet clear whether the rule will be among the regulations that could be the focus of repeal efforts through use of the CRA.  Additionally, Congressional Republicans will likely subject the CFPB’s operations to heightened oversight and will probably seek to repeal the agency’s authority to prohibit arbitration agreements and to issue guidance related to indirect automobile lending.

Enforcement Outlook Generally

Although the CFPB’s activities may be reduced through reformation of the agency or an appreciable change in its leadership, such changes are also likely to be accompanied by heightened regulatory and enforcement efforts by state government officials and an increase in efforts by consumers to seek redress in the courts.  Anticipating that the incoming Administration could result in a reduction of enforcement activities against banks and financial institutions at the federal level, many state attorneys general are indicating that they will step into the vacuum to protect consumers if necessary.  It has been widely reported,[5] for example, that both New York and California attorneys general intend to fill any regulatory enforcement void created by the incoming Administration.  Nevertheless, a shift in the CFPB’s enforcement priorities may have a lasting impact on financial institutions and financial markets.


Going forward, payments companies and other consumer financial services industry participants should certainly monitor changes in laws, regulations, and enforcement actions closely as they seek to better understand these changing legal and regulatory dynamics and the nature of the regulations with which they will be required to comply.

Copyright 2016 K & L Gates

[1] See, Eric A. Love, Judith Rinearson and Linda C. Odom, CFPB Finalizes Expansive Prepaid Account Rule Creating New Compliance Hurdles, K&L Gates Legal Insight, (Nov. 2016),….

[2] See, e.g., Press Release, House Financial Services Committee, Who will protect consumers from the overreach of the Consumer Financial Protection Bureau? (Mar. 3, 2015),….

[3] See, Respondent Consumer Financial Protection Bureau’s Petition for Rehearing En Banc, No. 15-177 (D.C. Cir. Nov. 18, 2016) (Doc. #1646917).

[4] See, PHH Corp. v. Consumer Financial Protection Bureau, No. 15-1177 (D.C. Cir. Oct. 11, 2016).

[5] See, e.g., Joel Stashenko, Trump Presidency Could Shift Regulatory Spotlight to State and AG, N.Y. Law Journal, Nov. 14, 2016.